“The contract is only 10% of the story. A deep understanding of the gap between the Israeli legal culture and the local one - that is the other 90% that ensures the project's success.” - Prof. David Levy, an expert in international law, Harvard University
An urgent phone call I received this week from Yossi, a well-known Israeli developer, illustrated to me once again how critical the issue of securing investor funds in international projects is:
“Ilan, the board of the Romanian bank rejected the request for bank guarantees for the project! We have 12 buyers who have already signed contracts and transferred advances of 25%. I need a solution yesterday.”
The legal gap between Israel and international markets
In Israel, the Sale (Apartments) (Securing Investments of Apartment Buyers) Law, 5735-1974, provides a clear and familiar framework for securing buyers' funds in developer projects. By contrast, when it comes to projects abroad, a completely different legal complexity comes into play:
- Different legal systems: Every country has a unique regulatory framework.
- Different legal language: Identical legal concepts may be interpreted differently in different countries.
- Different expectations: The Israeli investor arrives with expectations built on the basis of local experience.
According to a survey we conducted among 150 Israeli real estate investors active abroad, 78% cited “uncertainty about securing the funds” as the main factor deterring them from larger investments abroad.
Key mechanisms for securing funds in international markets
So how, nevertheless, are investors' funds secured in projects abroad? Here are the main mechanisms and how they differ:
1. Bank Guarantee:
How it works: A local bank in the target country undertakes to pay the buyer a pre-defined sum in the event that the project is not completed or the property is not transferred to his name.
The difference from Israel: In Israel this is one of the main and most common security options. Abroad, obtaining a bank guarantee may be far more complex, requires significant collateral from the developer, and is sometimes impossible for Israeli developers.
“The first time I tried to obtain bank guarantees for a project in Bucharest, the local bank demanded that I deposit with it 95% of the guarantee amount as collateral. What is the point of that?” - Doron M., an Israeli developer active in Romania
2. Title Insurance:
How it works: This insurance protects the buyer against future legal problems concerning ownership of the property, such as hidden liens or third-party ownership claims.
The difference from Israel: In Israel, the matter of registering rights is well regulated through the Land Registry Office (“Tabu”). In many countries around the world, registration of land rights is less certain, which makes title insurance especially critical.
3. Escrow Account:
How it works: The funds are deposited in a trust account managed by a neutral third party and released to the developer only as the project progresses according to defined milestones.
The difference from Israel: In Israel, a trust account is regulated by law. Abroad, the conditions and the regulation vary dramatically from country to country.
A 2023 EY study found that escrow accounts are the preferred mechanism for 67% of international investors in cross-border real estate projects, thanks to the transparency and flexibility they allow.
4. Registering a Caveat/Notice of Interest:
How it works: Registering a note in the local land register that informs third parties of the buyer's rights in the property.
The difference from Israel: In Israel, a priority notice is a strong and common legal tool. In many countries, the effectiveness of the registration depends on the local system and varies dramatically.
5. Construction Completion Insurance:
How it works: This insurance is intended to ensure completion of the project in the event of the developer's bankruptcy or failure.
The difference from Israel: In Israel, there is no parallel insurance mechanism as a standard; rather, bank guarantees fill this role. Abroad, this is a solution that is gaining popularity, especially in large projects.
Insights from the field: what Israeli investors are really looking for
From my experience accompanying international projects, the Israeli investor arrives with local experience and expectations derived from it. He expects to find mechanisms similar to those he knows from the Israeli market, and tends to be suspicious when he encounters different arrangements. This is a critical point that many developers miss.
A model for securing buyers' funds that works in a variety of markets
Accompanying over 300 cross-border transactions led me to develop a working model that combines the following elements:
1. Legal-cultural translation - adapting local fund-securing mechanisms to the expectations of the Israeli investor.
2. A combination of complementary protection mechanisms:
o A trust account structure with defined milestones, and external supervision of the fulfillment of the milestones (to the extent possible and agreed by the developer).
o Security mechanisms adapted to local legislation.
o Registration of buyers' rights in accordance with the local system.
o Transparency and financial audit requirements.
3. Practical thinking - accompanying the developer on key points to which the Israeli investor attaches special importance.
Critical differences in fund-securing mechanisms between major markets
USA
In the American market, title companies (Title Companies) are the key player in securing buyers' funds. The level of regulation varies dramatically between the different states - the mechanisms in New York or California are significantly stricter and more developed than those in Florida or Texas.
“The gap between New York and Florida in security requirements for developer projects is like the gap between Switzerland and Romania.” - Alex S., an Israeli-American real estate developer
Europe
In the countries of the European Union there is enormous variation: Western Europe is characterized by developed project completion insurance mechanisms, while in Eastern Europe the mechanisms are less developed and require legal creativity.
An interesting example is Spain, where following the economic crisis of 2008 and many cases of developer collapses, legislation was introduced requiring that all buyers' payments be deposited in supervised trust accounts.
East Asia
In markets such as Singapore, Thailand or Japan there are at times significant restrictions on foreign ownership of land. This leads to complex legal structures (such as local companies or long-term lease agreements) that create an additional layer of risk for the investor.
Why Israeli legal support is essential for a developer operating abroad
Just as an international court uses an interpreter to bridge language gaps, an Israeli developer operating abroad needs a “legal interpreter” who can translate the foreign legal structure into a language the Israeli investor understands.
“My American lawyer is excellent, but he simply doesn't understand what troubles an Israeli investor,” says Yair, a developer who developed a commercial complex in Philadelphia. “The Israeli legal support enabled me to bridge the cultural-legal gap and turn reluctance into trust.”
A 2024 Harvard University study found that in international real estate transactions, “cultural-legal bridging” is one of the five leading factors in a deal's success, especially when it comes to investors from countries with a different legal tradition.
Summary: the Israeli investor wants to understand before he is willing to invest
The typical Israeli investor is sophisticated, demands transparency, and attaches supreme importance to securing his money. As a veteran investor told me: “I'm not looking for the same security I have in Israel, I'm looking to understand how my money is protected in the foreign country.”
The developers most successful at raising Israeli capital for projects abroad are those who invest in building a “bridge of trust” - explaining in simple and clear language how the local mechanisms protect investors' funds, and presenting this as an advantage and not a disadvantage.
If you are planning a project abroad and want to raise Israeli investors, remember: investing in planning the security arrangement and explaining it to investors is perhaps the most important investment you will make.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית